FIRB approval required for certain deceased estates

It had long been accepted that beneficiaries under a Will, regardless of their nationality or ordinary place of residence, could receive Australian land, assets and securities as part of probate without needing to concern themselves with Australia’s foreign investment rules.

This was because there was a widely framed exemption from the operation of the rules for persons who acquire interests through a Will or by operation of law.

However, this position changed on 1 January 2021, when foreign persons who receive estate property through administration of a Will ceased to be exempt from the foreign investment framework. As a result of this change, it became a requirement that these beneficiaries obtain clearance from Australia’s Foreign Investment Review Board (FIRB) in order to receive relevant interests in Australian land, assets and securities.

Who needs to seek FIRB approval?

The obligation to seek FIRB clearance applies to ‘foreign persons’, which is broadly defined to include individuals not ordinarily resident in Australia as well as corporations and trusts in which individuals not ordinarily resident in Australia hold a substantial interest.

Those considered not to be ordinarily resident in Australia are not only foreign nationals, but can also include Australian citizens living overseas (though, in certain circumstances section 35 of the Foreign Acquisitions and Takeovers Regulation does provide an exemption for land acquisitions by persons with a close connection to Australia e.g. those persons residing overseas but have Australian citizenship). For Australian citizens there is no defined concept of ‘ordinarily resident’ (for non-citizens the test is that the individual has a legal right to be in Australia and has been in Australia during 200 or more days in the period of 12 months immediately preceding acquisition time). When it comes to determining whether an Australian citizen living overseas is ordinarily resident in Australia it is necessary to consider their actual circumstances, as the ordinary meaning needs to be given to the words ‘ordinarily resident’ and the question is one of fact and degree.

For the executor of a will, or trustee of a discretionary testamentary trust created under a will, they would not generally require FIRB approval. However, if assets caught by the FIRB regime otherwise pass into a testamentary discretionary trust set up in your will (rather than directly to a beneficiary) and the (often very wide) class of the TDT’s potential beneficiaries does (or may in future) include anyone who is a foreign person, then the trustee of the TDT will automatically be deemed to be a foreign person as well. This means that the trustee may need to seek FIRB approval (and pay an application fee) to receive certain assets from your estate and/or to acquire certain assets within the TDT in the future. Further, even if none of the TDT’s potential beneficiaries is a foreign person when you die, in the absence of provisions in your Will expressly preventing any foreign person from ever being a potential beneficiary, the trustee will need to monitor whether any of the TDT’s beneficiaries is or has become a foreign person in the future. This may occur because, for example, your child marries a foreign person or a grandchild of yours is born overseas. The trustee will then need to promptly notify the Treasurer if the trustee has, as a result, automatically become a foreign person themselves. Given that a trust can continue for up to 80 years and that failure to comply with these requirements could expose the trustee to substantial civil and criminal penalties, this could lead to your chosen trustee resigning from their role to avoid these responsibilities.

A similar application of the exemption of devolution by operation of law may be applied to a beneficiary who receives a distribution out of a deceased estate according to the statutory rules of succession (for example when the deceased died intestate without a valid Will), as their acquisition is entirely through the operation of law and there is no voluntary action.

When does a beneficiary under a Will need to seek FIRB clearance?

Where FIRB notification is required, the point at which a foreign person is considered to have taken a notifiable action is generally the time at which the legal interest is acquired on completion of administration of the estate. In some circumstances, a foreign person may not be certain they will actually receive an interest under a will until the administration of the estate has been completed, meaning they could not be expected to seek foreign investment approval prior to acquiring the interest. In these circumstances, the foreign person is expected to submit their relevant foreign investment notification/application within 30 days after the interest has been acquired.

Once FIRB receives the notification/application it will assess whether the acquisition by the beneficiary is contrary to Australia’s national interest. In order for acquisition to come with Australia’s national interest, FIRB may impose conditions on the acquisition. For instance, where a foreign person inherits vacant land or an established dwelling, they may be required to develop the land to increase Australia’s housing stock.